The U.S. government has "basically nationalized" banks and created a regulatory regime in which their balance sheets are dictated by hypothetical situations laid out in its stress test, Rafferty Capital analyst Dick Bove told CNBC on Thursday.

Bove spoke on "Squawk Box" a day after the Federal Reserve approved the capital plans for 29 of 31 banks, clearing the way for the institutions to issue dividends and buy back shares. Plans of the U.S. units of Deutsche Bank and Santander fell short (though Deutsche's U.S. unit had not planned any dividends or buybacks in the first place).

"Essentially they claim that this is a hypothetical test—in other words, this, that, or the other thing is supposed to happen to the economy. But it's not hypothetical if you force the banking companies to restructure their balance sheets to adjust to that hypothetical," Bove said.

"If you tell the banks we're going to have 10 percent unemployment or the GDP is going to drop 6 percent, they're supposed to structure their balance sheet differently than if you say it's going to be 5 percent and your economy is going to grow at 2 percent a year."

In the latest stress test, banks including Goldman Sachs, JPMorgan Chase and Morgan Stanley had to revise shareholder payout plans in order to receive a passing grade after the Fed placed capital markets under additional stress under the terms of this year's test, which assumed more corporations would go bankrupt in a crisis.

Bank of America received "conditional approval," meaning the Fed raised concerns about the way the bank prepares for a crisis, but acknowledged its capital levels were adequate to weather such an event.

The Fed prohibited the U.S. units of Deutsche Bank and Santander from issuing dividends or stock buybacks, citing "widespread and critical deficiencies" in measuring risk and other areas of the test.

The government has gone way beyond hypotheticals and stepped in to say it doesn't want certain banks to be too big and will penalize them if they do, Bove said. It has also suggested it will punish banks that do not carry what it considers to be the right mix of securities and loans in its portfolios, he added.

At the same time the banks are footing the bill for in-house government employees who are tasked with making sure they do what the regulators tell them to do, he said.

Asked whether it was a problem that regulators are still coming up with deficiencies despite the presence of federal examiners, he said the government has gone "way overboard to the point of absurdity."

"There is no system anywhere in the world as absurd as the regulatory system set up in the United States to control the banking industry," he added.

Every year the Fed tightens the stress test a little more because its operating theory is focused on taking risk out of the system and force banks to have more capital and liquidity, he said. However, in doing so regulators are blocking the banks from assisting the economy.

The stress test has become "the Super Bowl of banking," but it should not be that big of an event, Mike Mayo, an analyst at equity broker CLSA, said on "Squawk Box."

"If there's a problem with a bank, the regulators should let the banks know on a day-to-day basis," he said.

Regulators always want banks to hold more capital, he said, but what they should focus on now is putting finer rules for banks in place to eliminate uncertainty. "For all the uncertainty in the market, the greatest source of uncertainty right now is what the regulators will do," he said.

CLSA has a sell rating on shares of Bank of America for "qualitative issues" because the firm believes the bank does not have "a complete grasp of the numbers," Mayo said.

This is the second year the Fed has flagged problems in Bank of America during the stress test. The central bank prohibited the bank from making distributions to its shareholders in 2014 after the institution admitted there were problems in the data it used during the test.

Read More GE weighs deeper cuts to banking business: WSJ

Given those issues, Mayo said CEO Brian Moynihan should not have been promoted to chairman of the board.

Bank of America said the company had no comment on Mayo's assessment of Moynihan.

The company authorized a $4 billion common stock repurchase program after receiving the Fed's approval. Information provided by Bank of America shows that it plans to return $4.4 billion to shareholders in 2015, up from $2.9 billion in 2014.

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